Child tax credit

A child tax credit is a tax credit available in some countries, which depends on the number of dependent children in a family. The credit may depend on other factors as well, such as income level. For example, in the United States only families making less than $110,000 per year may claim the full credit. Similarly, in the United Kingdom the tax credit is only available for families making less than £42,000 per year.

Germany

Germany has a programme called the "Kinderfreibetrag" which functions as a tax credit.

United Kingdom

In the United Kingdom, a family with children and an income below about £32,200 can claim child tax credit on top of child benefit. The tax credit is "non-wastable" – it is paid whether or not the family has a net tax liability – and is paid in or out of work. Higher rates are paid for disabled children. It is integrated with the working tax credit, which also provides support for childcare costs.

All taxable income is tested for the credit, so a couple who both work and have children, will have both salaries taken into account. Tax Credits may be capped which it is claimed could affect the poorest families disproportionately. On Monday 26th October 2015 the House of Lords voted for Labour proposals for financial redress to those affected by reduced entitlements.

Tax credit

A tax credit is a tax incentive which allows certain taxpayers to subtract the amount of the credit from the total they owe the state. It may also be a credit granted in recognition of taxes already paid, or (as in the UK) a form of state support for low earners.

Incentive tax credits may be used to encourage behaviors like investment or parenting. A credit directly reduces tax bills, unlike tax deductions and tax exemptions, which indirectly reduce tax bills by reducing the size of the base (for example, a taxpayer's income or property value) from which the tax bill is calculated.

Most tax credits are nonrefundable tax credits, meaning that they can only be used to the point at which no more taxes are owed. However, some tax credits are refundable tax credits, meaning that if the credit exceeds the amount of taxes owed, the excess is returned to the taxpayer.

Credit for payments

Many systems refer to taxes paid indirectly, such as taxes withheld by payers of income, as credits rather than prepayments. In such cases, the tax credit is invariably refundable. The most common forms of such amounts are payroll withholding of income tax or PAYE, withholding of tax at source on payments to nonresidents, and input credits for value added tax.